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Draws on the results of a survey into alternative risk transfer by Marsh Risk Finance covering major corporations over three years. Covers the needs of the buyers rather than the suppliers. Shows how alternative risk transfer can be of value to the insurance world in particular. Highlights a need for this technique to reach a wider audience as buyer perceptions change.

The purpose of this article is to investigate the impact of counterparty risk on the basis risk of industry loss warranties as well as on reinsurance with and without collateral under different dependence structures. The authors additionally compare the solvency and Sharpe ratio for different premium loadings and contract parameters.

The authors propose a model framework extension to account for the counterparty risk of risk transfer arrangements. Copulas are used to also take into account non-linear dependencies between risk factors, and Monte Carlo simulation is employed to derive numerical results and to conduct sensitivity analyses.

The authors show that the impact of counterparty risk is particularly pronounced for higher degrees of dependencies and tail dependent losses, i.e. in cases of basis risk levels that appear low if counterparty risk is not considered. With respect to counterparty risk management, the authors find that already partial collateralization limits counterparty and basis risk to more acceptable levels.

The study results are particularly relevant to practitioners, as insurers may not only underestimate the “true” basis risk of index-linked instruments, but also the effect of counterparty risk of reinsurance contracts along with the consequences for solvency and profitability.

The authors extend existing literature by allowing for the (partial) default of industry loss warranties and reinsurance under different dependence structures. Furthermore, the authors include profitability in addition to risk considerations. The interaction effects between counterparty risk and the basis risk of index-based alternative risk transfer instruments are largely unstudied, despite their considerable relevance in practice.

The purpose of this paper is to provide a detailed analysis of industry loss warranties (ILWs), an alternative risk transfer instrument which has become increasingly popular throughout the last few years.

The authors first point out key characteristics of ILWs important to investor and cedent, including transaction costs, moral hazard, basis risk, counterparty risk, industry loss index, and regulation. Next, the authors present and discuss the adequacy of actuarial and financial approaches for pricing ILWs, as well as the aspects of basis risk. Finally, drivers of demand and associated models frameworks from the purchaser's viewpoint are studied.

Financial pricing approaches for ILWs are highly sensitive to input parameters, which is important given the high volatility of the underlying loss index. In addition, the underlying assumption of replicability of the claims is not without problems. Due to their simple and standardized structure and the dependence on a transparent industry loss index, ILWs are low‐barrier products, which can also be offered by hedge funds. In principle, traditional reinsurance contracts are still preferred as a measure of risk transfer, especially since these are widely accepted for solvency capital reduction. However, the main important impact factor for the demand of ILWs from the perspective of market participants, i.e. large diversified reinsurers and hedge funds, is the lower price due to rather low transaction costs and less documentation effort. Hence, ILWs are attractive despite the introduction of basis risk and the still somewhat opaque regulatory environment.

An important issue for future research is how reinsureds deal with the basis risk inherent in ILWs. Another central point is the development of a European industry loss index and the creation of an exchange platform to enable an even higher degree of standardization and a faster processing of transactions.

ILWs feature an industry loss index to be triggered, and, in some cases, a double‐trigger design that includes a company indemnity trigger. ILW contracts belong to the class of alternative risk transfer instruments that have become increasingly popular, especially in the retrocession reinsurance market. There has been no comprehensive analysis of these instruments in academic literature to date. Consequently, the authors believe that this paper provides a high degree of originality.

Alternative risk solutions describe the transactions and vehicles that manifest the convergence of insurance and financial markets. This brief article surveys the concepts and issues (regulatory, legal, accounting, etc.) that form the foundation for the transfer and financing of risks not previously priced or traded in financial markets.

Catastrophe (CAT) events associated with natural catastrophes and man-made disasters cause profound impacts on the insurance industry. This research thus reviews the impact of CAT risk on the insurance industry and how traditional reinsurance and securitized risk-transfer instruments are used for managing CAT risk.

This research reviews the impact of CAT risk on the insurance industry and how traditional reinsurance and securitized risk-transfer instruments are used for managing CAT risk. Apart from many negative influences, CAT events can increase the net revenue of the insurance industry around CAT events and improve insurance demand over the post-CAT periods. The underwriting cycle of reinsurance causes inefficiencies in transferring CAT risks. Securitized risk-transfer instruments resolve some inefficiencies of the reinsurance market, but are subject to moral hazard, basis risk, credit risk, regulatory uncertainty, etc. The authors introduce some popular securitized solutions and use Merton's structural framework to demonstrate how to value these CAT-linked securities. The hybrid solutions by combining reinsurance with securitized CAT instruments are expected to offer promising applications for CAT risk management.

The authors introduce some popular securitized solutions and use Merton's structural framework to demonstrate how to value these CAT-linked securities. The hybrid solutions by combining reinsurance with securitized CAT instruments are expected to offer promising applications for CAT risk management.

This research reviews a broad array of impacts of CAT risks on the (re)insurance industry. CAT events challenge (re)insurance capacity and influence insurers' supply decisions and reconstruction costs in the aftermath of catastrophes. While losses from natural catastrophes are the primary threat to property–casualty insurers, the mortality risk posed by influenza pandemics is a leading CAT risk for life insurers. At the same time, natural catastrophes and man-made disasters cause distinct impacts on (re)insures. Man-made disasters can increase the correlation between insurance stocks and the overall market, and natural catastrophes reduce the above correlation. It should be noted that huge CAT losses can also improve (re)insurance demand during the postevent period and thus bring long-term effects to the (re)insurance industry.

The recent trend of integrated risk management has resulted in corporations reassessing their risk management practices. Insurance derivatives and insurance‐linked securities are emerging as alternatives or complements to traditional resisurance capacity. Despite its theoretical benefits, the market for insurance‐linked transactions has not matured, due to problems of information asymmetry and lack of transparency. This article proposes a solution to resolve the conflicting interests preventing insurers/reinsurers and investors from more widely trading insurance risk.

The author traces the history and philosophy behind the concept of risk transfer and concentrates on the underlying theory of insurance. He argues that the complexity of the modern business world has meant that the simplicity of the concept has been lost. To this has been added the additional burden of regulation and a greater concentration on risk management. He suggests that the concept of enterprise risk management is the one which cuts this Gordian Knot and describes its benefits in adding value to the enterprise.

Two strands of the literature are combined, namely the modeling of disability insurance and the design, valuation and discussion of insurance-linked securities.

This paper provides a discussion regarding the advantages and detriments of disability-linked securities in comparison with mortality-linked bonds and swaps as well as regarding potential disability-linked indices and the potential use. The discussion is followed by an introduction of a potential design and a corresponding valuation of disability bonds and swaps.

This securitization will provide useful tools for the risk management of disability risk in a risk-based regulatory framework.

No disability-linked securities have been defined and discussed so far.